Ilyce Glink: Is buying shell of new home a bargain?

Published 2:20 pm, Friday, November 26, 2010

Q: For the past year, I have been looking at a home in my neighborhood that went into foreclosure. It is now being sold by the bank.

I have seen the property, and its current condition is just a framed-out shell. But my family and I immediately fell in love with it. It was new construction, and the builders ran out of money to complete the work.

We have really been trying to figure out how we could possibly get this home given our current financial state. The price of the home is currently $59,000. After doing research I also discovered that upon completion, the intended price of the home was to be around $550,000. The home has five bedrooms, four bathrooms, a huge master bedroom and enormous kitchen.

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I know that it will be at least another 16 months before we emerge from bankruptcy, and I fear that either the house will be sold or somehow taken off of the market. As fate would have it, I have found a job for $90,000 per year plus bonuses.

Since I started work in May, I have saved $7,000. I only spend what is absolutely necessary. I feel that we are going to get that home, and I know I still have a ways to go to reach the purchase price of $59,000, but I will get there. I do realize it is currently just a shell and that I will have to do plenty of work, but I am skilled and have plenty of family and friends that are contractors that are willing to help.

I guess I'm wondering if there is any advice you have for me since I now am earning money and paying off my debts and saving again.

A: I'm glad you've found a shell of a home you want to buy. The problem you're going to have is getting a mortgage if you haven't been out of bankruptcy for at least three to five years. You most likely will have a hard time getting any kind of financing to buy the home in its current unbuilt condition. Even if you pay cash for the house, you'll have a very difficult time getting a construction loan to finish it. You may need to get out of bankruptcy first.

While it's unlikely you will find a lender to assist you, you may be able to raise the money from family members to buy the house. While I'd normally recommend seller financing - which is generally a long shot - it's unlikely to work for you because this is a foreclosure and the seller is a bank.

While the price seems cheap, it's only a deal if it is the right home for you at the right price, on the right terms and at the right time for you.

Here are a couple of things you should consider. First of all, what will it cost to finish the home? That includes whatever framing, roofing, plumbing and electrical work that remains to be done, as well as finishes to the home. You may think the price for the land and the current framing is a good deal, but you may find that the cost to finish the home will break your budget.

Second, will you be able to afford to live in and maintain the home? People often find a "bargain" in real estate but forget to consider the costs that come with a large home, including higher utility, maintenance and insurance costs, and larger property tax bills.

While you now have a good income, you should make sure that you don't overextend yourself in this project. Going through bankruptcy and undertaking a real estate construction project at the same time may be a bit much.

You need to make sure you've considered all of your options and obligations for the years to come. It's great that you're saving money, but you need to decide whether you will need that money for college savings for your children or your retirement.

If, after considering all that, you still want to press ahead, chat with lenders who can help you figure out if there's a way you can make this work out. More important, work with the lender to figure out whether owning this home will fit your long-term financial obligations and budget.

If you find that owning the home meets your long-term financial goals, then you'll want to talk to some local banks in your area that keep loans in their portfolios and that may be willing to give you a loan. Your local bank may be slightly more flexible with lending requirements than some of the national lenders.

If you have questions, you can call Ilyce Glink's radio show toll-free (800) 972-8255 any Sunday, from 10 a.m.-noon, or through her website, www.thinkglink.com.